Wednesday, September 05, 2012

Is the U.S. economy still the most powerful in the world? That is what we are told
as the United States does have by far the world’s largest Gross Domestic Product (GDP).
In fact, American GDP is larger than the next three largest economies combined which
are China, Japan, and Germany.
Is the United States economy really larger than the world’s second, third, and
forth-largest economies combined? This is an important question as GDP is one of the
holy grails of today’s economists and policy makers. If we can only make GDP rise,
we are assured we will grow our way out of our economic problems. American GDP in 2011
was roughly $15 trillion U.S dollars. The next 3 largest economies China (6T), Japan (6T),
and Germany (3T) combined at a GDP in 2011 of also roughly $15 trillion U.S. dollars.
But lets look at some of the real production statistics in each of the economies.
I will compare the U.S. with its $15 trillion dollar economy against the next three
largest economies which I will refer to as the “Block Of 3” which comprises China, Japan,
and Germany and their combined GDP of $15 trillion USD. Be prepared to be shocked.
Total exports from the U.S. last year were $1.5 trillion USD. The Block of 3 had total
exports of $4 trillion. The U.S. produced 86 million tons of steel in 2011, the Block of
3 produced ten times that number with 835 million tons of steel. The U.S. produced
8.7 million cars in 2011. The Block of 3 produced 4 times that number with 33 million
units produced. In the Internet and communications area, the U.S. has 245 million Internet
users; the Block of 3 has 681 million Internet users. Total mobile phone subscriber numbers
are even more lopsided with the U.S. having 328 million mobile phone subscribers with the
Block of 3 having 1.2 billion subscribers.
In terms of national wealth, China alone now has a total household net worth larger than
the U.S. with $69 trillion in household wealth versus $57 trillion.
So where is the disconnect? Most of us will remember from Economics
101 the GDP calculation is as follows.
GDP = private consumption + gross investment + government spending
+ (exports – imports)
When we analyze the U.S. GDP numbers compared to the world’s next 3 largest
economies or the Block of 3, we can see the U.S. still runs and has run massive
trade deficits so the “(exports-imports)” part of the equation will hurt the
U.S. GDP numbers.
Gross investment has been declining for a decade in the U.S. so the gross
investment side of the U.S. GDP calculation is also a negative. In 2006, U.S.
housing starts were averaging 1.6 million units per month. In 2012, we are
excited when the number is over 300,000 per month. In 2007 our total vehicle
production was 13 million units, however, in 2011 we produced only 8.7 million
units. Clearly the production investment side of the economy in the U.S. is
not helping the GDP numbers.
When we look back at the GDP calculation that leaves us government spending and
consumption, which is basically what the U.S. economy has become. Consumption is
now 73% of the U.S. GDP calculation. Where does our spending and consumption come
from but, of course, printed money as the Federal Reserve last year bought close
to 80% of new Treasury debt.
What has really been going on in this economy is a government induced bubble that
has developed over the last several decades where total credit in the economy has
grown from $1 trillion to $50 trillion in the last 43 years.
The hard reality facing policy makers today is that the entire U.S. economy is a ponzi
scheme based on cheap credit. This massive explosion of debt and credit has resulted
and aided in the transformation of the U.S. economy from production into one of
consumption. General Electric quickly focused on moving into media and finance as opposed
to producing things. Production based business were sold off or offshored. General Motors
started financing home loans through GMAC instead of fixing their car business. We built
homes that no one needed. All the classic signs of malinvestment created by a credit boom
were there. Our real productive sectors of the economy have fallen off a cliff and we have
attempted to mask this with government handouts and money printing.
Clearly the entire American economic system needs radical restructuring. Governments must
be radically downsized. We have a tax system which has the world’s highest corporate rates
yet collects little or nothing from the countries largest corporations. There is no real
market for home loans anymore with the government being the lender of last resort through
Fannie, Freddie, and the FHA. Savers are being robbed of their interest payments on their
capital by the Federal Reserve’s manipulation of interest rates. Rule-of-law has been
replaced with rule-by-lawyer as rent seeking by the legal profession in this economy runs
rampant.
American GDP is a bubble propped up by government spending, government hiring, consumer
credit and debt. The Fed prints money sending it into the economic ecosystem in order to
bring up the demand curve for goods and services, which creates GDP, or in our case
consumption.The economy is so far unbalanced and so far in debt that default and the
accompanying depression may be the only ways out of the situation.
Without major structural reform the United States will continue to see jobless
“recovery” after jobless recovery. There needs to be a focus on production and real wealth
creation as opposed to false economic statistics such as the GDP number which is no longer
the barometer of a healthly economy.